Table of Contents
Short Sales
In a broad sense, a "short sale" is any sale in which the proceeds are insufficient to cover the cost of closing the sale. This definition of short sale focuses attention on the problem with such sales: the seller's lack of money at the closing table. In a short sale, the seller is said to be "upside down."
In a short sale something has to give or the deal cannot close for want of clear title. The seller is going to have to put money into the sale, or transaction costs have to be reduced (e.g. commissions), or one or more creditors agree to reduce debt or some combination of these things has to happen. Debt reduction by the mortgage holder is what is usually meant when real estate agents talk about doing a "short sale." Doing a "short sale" sounds simple. It is not.
What follows is an explanation of the process involved. It begins with Do the Numbers so you, your client and eventually the lender will understand the exact financial situation. Part of doing a short sale is having a serious Talk with the Client about their financial condition. Once you have the numbers and know your client's financial condition, you can Contact the Lender, Market the Property, Write the Deal and, finally, Get Paid.
Short sales are driven by the threat of foreclosure. Most lenders will not consider a short sale until foreclosure has become a real possibility. That means missed payments and financial distress. Foreclosure also drives short sales because lenders, as a rule, will consider a short sale only when they will make more on the short sale than they would make in a foreclosure. Click HERE for an explanation of Oregon foreclosure laws.
Agents sometimes consider a short sale for the first time when the seller accepts an offer that will not generate enough money to clear title. This is an extremely poor practice. If the seller has not missed any payments, and is not otherwise in serious financial distress, the lender is probably not going to be interested in a short sale. Lenders are simply not interested in protecting the seller's other assets or, for that matter, real estate commissions and other closing costs.
What lenders want to know in a short sale situation is what business people always want to know: what's in it for me? Do not make the mistake of approaching a lender with what is in it for the seller, the buyer or for you. Instead, to be successful in a short sale situation, you must be prepared to show the lender that approving this sale at this time for this amount of money is in their best interests. To do that, you have to know the numbers.
return to top Do the Numbers
Short sales, like all real property sales, should start with a broker's price opinion (BPO) backed by a Competitive Market Analysis (CMA). Click HERE for a detailed discussion of BPOs and CMAs. Lenders are not going to discount their loan so a buyer can acquire the property for less than its actual value. That means you have to know the actual value of the property. Market value is the number the lender will start with, not the loan payoff or even the offered price.
Your CMA and BPO will give you what the property should bring on the open market. Market value, unlike sales price, does not depend on the seller's financial condition or need to sell. Such factors may motivate a seller to reduce their asking price below market, but that is initially of no interest to a lender. To the lender, it is simply a matter of figuring out what process is likely to result in the most money in their pocket. To get there, they have to start with the actual market value. Sure, they are going to have to discount that number, but first they need the number.
Once you have market value, you can do a preliminary net sheet for your seller. The net sheet will tell you, the seller (and eventually the lender) how much money an offer will actually make available. You have to figure the unpaid balance of the loan(s), any late fees, real estate commissions, necessary repairs, closing costs and the like. What you are looking for is cash to the seller at closing. That number will be negative in a short sale situation.
How negative the number you arrive at tells you how "short" the sale will be for a given purchase price. It is the amount you are going to ask the lender to eat. You can compare that number with the rule of thumb twenty-five percent of market value recovery in foreclosure to get an idea of whether a short sale is going to be attractive to the lender. If you are going to have to ask the lender to give up more than they can expect in foreclosure, they are going to say no. If your numbers says you are in the ball park, it is time for a serious conversation with your client.
return to top Talk to the Client
Sellers, quite naturally, see a short sale as a way to protect their income and assets. Lenders don't see it that way at all. In fact, lenders see ALL the seller's income and assets, not just the property, as a potential source of funds to pay them what is owed on the loan. This is true even though most lenders cannot take default judgments on most residential property in Oregon. Most lenders will want the seller to provide proof the seller lacks the income and assets to payoff the loan at closing before they will agree to reduce the payoff on their loan.
Your seller client should anticipate that the lender will ask for information about savings accounts, investments, other real estate, cash, money market accounts and the like. Tax returns are, of course, always something lenders like to see. Having this information available upfront will not only speed up the short sale process, but go a long way toward convincing the lender they are dealing with a competent professional. Having in hand a financial statement that shows the seller doesn't have the ability to pay off the loan, makes a successful short sale a lot more likely.
You can also make a short sale more likely by talking to your client about a "hardship letter." The letter will explain how the seller got into the financial situation they find themselves in. Job loss, illness and other "but of the grace of God" explanations of financial distress make a better impression than asset mismanagement, real estate speculation and so on. It's not that a lender will never agree to a short sale where the hardship was self-imposed; it's just that like all people lenders tend to be more sympathetic when people are caught up in circumstance beyond their control. The lender will also be able to use the hardship letter to assess the likelihood of the seller filing bankruptcy. If that is a possibility, they may be more open to working toward a short sale. Click HERE for a discussion of bankruptcy laws.
Talking to your client about finances and hardship may suggest that marketing the property as short sale is not really their best option. Ethical agents will at this point suggest the seller explore other options. A good source of reliable information about foreclosure can be found on the website of the Department of Housing and Urban Development at: http://www.hud.gov/local/or/homeownership/foreclosure.cfm. Once you have talked to your client and have a financial statement and hardship letter, it is time to contact the lender.
return to top Contact the Lender
Contacting a lender is not as easy as it once was. The bundling and selling of real estate loans on the securities markets has greatly complicated mortgage lending. It has also made finding the actual holder of a mortgage more complicated. It may take a number of phone calls to find the mortgage holder- or worse yet, mortgage holders.
Once you find the mortgage holder, you will need to find the person within that organization who has the authority to authorize a short sale. This can be a daunting and, depending on the number of lenders and their relationship, sometimes impossible task. Most lenders, however, will have a "short sale," "workout" or "mitigation" department. In that department, once you find it, there will be one or more supervisors with real decision-making authority. These are the people you are trying to find.
The first step once you find the people you need to deal with is to provide them with a written Letter of Authorization. A Letter of Authorization is a letter from the property owner(s) authorizing the lender to disclose personal information about the seller and the property. Such letters contain the property address, loan number, owner's name, agents name and contact information, the date and the authorization statement. Click HERE for sample Letter of Authorization. Offering the lender a Letter of Authorization early in the process will help you establish credibility.
Once you have found the people you need to deal with, given them your letter of authorization, and received from them any loan data you need, you can present your plan for marketing the property as a short sale. Remember, you represent the seller, not the lender. You probably won't get any commitment from the lender at this point, but you can establish your credibility, explain the situation, set out your marketing plan and get the lender's understanding and acquiescence. That way, when you get an offer and send it in for approval, the lender will know what is going on. Now all you have to do is market the property.
return to top Market the Property
Marketing a short sale is just like marketing any property with one serious exception. That exception is that at some point the seller is going to have to disclose the short sale requirement to the buyer. When and how that disclosure is made is a big part of marketing a short sale property.
When to make the "short sale" disclosure depends largely on the numbers you developed with your seller. If the asking price minus the seller's closing costs is more than the loan payoff, a full price offer will not result in a short sale. In such a situation, the disclosure would not be necessary, or usually made, until the seller was considering an offer less than the asking price that would result in a short sale. When a full price offer will not result in short sale, the property can be marketed just like any other property. No short sale notice would be needed until the seller countered an offer that did not generate sufficient revenue to clear the title.
The general rule here is that a short sale disclosure is required prior to entering into any contract under which the seller will not be able to deliver clear title. If the seller is going to counter with a short sale contingency, the counter itself will disclose the short sale. When, however, the asking price itself is less than the loan payoff, and the seller will not or cannot make up the difference, every offer will trigger a short sale situation. That raises serious disclosure timing issues.
Disclosing a short sale situation signals seller distress. Seller distress can reduce offers to below market value. In addition, the uncertainty of the short sale process may discourage potential buyers and their agents before they even see the property. A short sale disclosure can also attract the attention of market predators, "low ball" offers and real estate scams of every stripe.
Your seller must be prepared for the marketing down-side of short sales before agreeing to market the property as a "short sale." The bottom line with a short sale is that the seller cannot accept an offer without a lender approval contingency. That means either inviting an offer with such a contingency or countering with the contingency. Either is a form of short sale disclosure.
Unless you use a short sale form, or your company has a standard short sale addendum, someone will have to draft the short sale contingency. Drafting such contingencies is well beyond the expertise of a real estate licensee. Nevertheless, knowing how such a contingency works is a big part of writing a short sale deal.
return to top Write the Deal
A short sale deal is special in several important ways. The first, of course, is the lender approval contingency. The second is altering standard deal procedures and deadlines to accommodate the lender approval contingency. A third is dealing with the potential for multiple offers created by the lender approval contingency. This section will deal with each of these issues in turn.
return to top Short Sale Contingencies
Short sale contingencies can be as simple as saying "subject to lender approval." Such a shorthand contingency is, however, a very bad idea. Like any contingency, it is important to spell out both context and consequences. The context here is that the debt owing against the property is more than the purchase price. The consequence is that the lender must agree to take less than the loan payoff or there can be no sale.
Starting with context and consequences helps you see what the contingency must contain. The buyer and seller should acknowledge that the purchase price will not provide sufficient funds to payoff the loan and clear the title and that as result the transaction is contingent upon the lender approving of the sale. This is a third-party approval contingency because the lender is not a party to the real estate sale agreement.
As between buyer and seller, there is usually a binding enforceable contract upon acceptance. With a short sale, however, the contract is contingent on the seller's creditors reaching approving of the sale. The time between buyer and seller acceptance of the sale contract and the lender's agreement to take less than the loan payoff amount is a critical time.
In Oregon, during the short sale contingency, the most commonly
used form for short sale addendums favors the buyer. OREF 027B
allows for a buyer to terminate the contract with written notice,
prior to the lender’s consent, for any reason. Absent such written
notice, the contingency binds both seller and buyer until the
lender approves the sale or the closing date occurs. Click
HERE
to view OREF 027B. If using another form, the nature of the
contingency should be made clear: that the sale is contingent on
the lender’s approval of the sale agreement on terms acceptable to
both buyer and seller. Further, the form should include a deadline
at which the buyer may withdraw if the bank is too slow in
responding, so as to prevent being stuck in the contract at the
lender’s mercy.
return to top Dealing with Deadlines
Standard sale agreement forms, and
Oregon's are no exception, contain time periods and deadlines that
run from
acceptance of the contract by the buyer and seller. In a
short sale situation,
the sale is uncertain until the lender approves. Buyers are
therefore going to
be very reluctant to do inspections, pay loan fees and so on until
they know the
creditors have approved. It is for that reason that short
sale form and
addendums usually suspend contract time and performance deadlines
until creditor approval is
obtained. However, the closing date is excluded from thi
ssuspension.
Attempts to move the statutory seller's disclosure deadline by contractual agreement raise serious statutory issues. Although a buyer can waive the disclosure, and their revocation rights under it, it is not clear that parties can by contract suspend the statutory deadlines themselves. If the buyer is considered to have waived rights under the statute by agreeing to deadlines other than those imposed by statute, they would have no statutory rights at all. On the other hand, if no waiver of statutory rights is intended, then the buyer can revoke anytime prior to actually receiving the disclosure.
It is far from clear that agreeing in a
contract that the seller will not provide the disclosure until
some date after
the date offer automatically suspends the buyer's rights under the
statute.
Fortunately, there is no real reason to delay the
disclosure. The condition of
the property does not depend on whether the sale is a short sale
or not. As
with any sale, it is wisest to give the seller's property disclose
and start the
revocation clock.
Among the most important of contractual deadlines is the payment of earnest money and the closing date. Buyers may be reluctant to tie up earnest money on a deal that needs lender approval. At the same time, the seller will want to know the buyer is serious before getting into the short sale approval process. One solution is some earnest money upon acceptance and more upon lender approval. The closing date can be handled by simply agreeing to close a certain number of days after creditor agreement is obtained.
Common Oregon short sale addendums make clear that, although other time and performance deadlines are suspended while waiting for lender approval, the contract closing date is excluded from such suspension. The closing date now terminates the contingency, if not satisfied or waived by that time by the lender. If the seller and buyer want the contract to continue, they must agree to a new closing date in writing. This change in how short sales are handled in Oregon came about due to lenders delaying the short sale process. Prior to 2008, buyers could find themselves stuck in limbo waiting for lender’s approval since short sale forms favored the seller.
If not using the standard OREF form, it is critical to the seller that the contingency be written so the deal automatically fails if the lender doesn't approve. Otherwise, the seller could find themselves bound to convey title they cannot clear. You will see short sale contingencies that make this mistake by having an approval period that expires without spelling out the consequences of not obtaining lender approval. As with any contingency, it is often more important to spell out what will happen if the contingency is not met than it is to spell what happens if it is met.
return to top Subsequent Offers
Whatever the details of the short sale contingency itself, some thought should be given to how subsequent offers will be handled. Lender approval takes time. During that time, it is not unusual to get other offers. Indeed, it is often in both the lenders and the seller's interest to try to get better offers. At the same time, short sales are uncertain enough for the buyer that introducing multiple offers into the mix can be very disconcerting.
A good short sale addendum will address the issue of subsequent offers. The old industry standby of taking "backup" offers doesn't really work. A lender will not approve an offer in "first place" if there is a better offer in "backup." Because a better offer will be more likely accepted, and result in less loss to lender and seller alike, it is often not in the seller's interest to withhold subsequent offers from the lender. At the same time, passing on subsequent offers can cause hard feelings, contract disputes and increase marketing difficulties.
One way to handle the multiple-offer problem is to warn buyers right up front that the seller will continue to market the property and submit all offers obtained to the lender for approval. This will discourage low-ball offers. It may also, however, complicate the approval process and discourage some buyers. Another approach is to create contingent offers under which there is no contract at all until the lender approves. Such contingent contracts can be terminated by either party for any reason prior to approval. This solves some problems, like timing issues, at the expense of certainty.
Other approaches, for instance, having an open "offer period" designed to obtain the best offer prior to submitting an offer to the lender, are possible. Whatever the approach, it must be clearly understood by all the parties before offers are accepted. Multiple listing service rules about "pending" sales must be addressed. Short sales are not just deals with a "subject to lender approval" contingency. Careful preparation, including client counseling and proper disclosures, is key. So important is such counseling that Oregon form publishers attach a "Short Sale A Brief Summary" to their short sale addendum. Click HERE to find a sample Short Sale A Brief Summary form.
The contractual issue of continued marketing is separate from the MLS issue. Any seller is entitled to continue to market their property. Putting that fact in the contract is a matter of wise disclosure, not legal right. None of this has anything to do with the multiple listing services.
Multiple listing services typically have two categories of listings for member search purposes. One is "active" and the other is "pending." Whether a property filed with the MLS is or should be carried as active or pending depends on the MLS rules. Parties cannot change these rules by contract. Brokers cannot change the rules either. It follows that whether a short sale is carried as "active" or "pending" is decided by the MLS, not the parties or individual brokers.
Some multiple listing services allow members to carry short sale listings as "active" until the short sale contingency is removed. Others simply enforce existing rules and carry short sales as "pending." One way tends to favor sellers and lenders, the other buyers. Which is "best" is a political issue to be resolved by MLS rule.
return to top Getting Paid
Short sales put pressure on commissions. It is just a fact of life. In short sales, there is not enough money to go around. The seller is in serious financial trouble. Foreclosure or bankruptcy may be on the horizon. The buyer is looking for a deal and the lender is losing money. Getting a fair commission in such circumstances can be an ordeal.
A seller in serious enough trouble to qualify for a short sale is not going to question the real estate commission. They don't really care how much the lender has to discount the loan as long as they don't have to pay. The lender, however, is going to care. And, if the seller is going to get a 1099 for the debt forgiven, they should too. So, real estate commissions are going to be an issue right off the bat.
Lenders are not opposed to paying real estate commissions. They are, however, much more business oriented than the average home owner. That means they will almost certainly negotiate the commissions paid. Agents can deal with this fact in two ways. One is to list the property at the commission rate typical for their area and expect to negotiate with the lender later. The other is to decide on a commission rate that is appropriate for the professional services provided to put together a successful sale and stick to it.
If the seller has hired, or is themselves, a foreclosure consultant or mitigation expert of some kind, you will want to carefully read the section on Dealing with Foreclosure Consultants.
Whatever the approach you choose with respect to listing side commission, thought needs to be given to the selling side. Multiple listing services have strict rules about offers of compensation. Basically, you must state the compensation as a dollar amount of a percentage of the sales price. This MLS policy can cause real problems in a short sale when the lender starts making approval contingent on commission reductions.
The MLS offer of compensation is an offer of a unilateral contract. A unilateral contract is one that is accepted by performance, not promise. The performance required to accept a unilateral offer of compensation in the form of a coop real estate commission is procuring a buyer ready, willing and able to purchase on terms acceptable to the seller. As a general rule, a buyer is procured when they write an offer that is accepted by the seller. That means a unilateral offer of compensation is accepted by the selling agent when they submit an offer that is accepted by the seller.
Once an offer is accepted, it can be changed only by mutual agreement. Put that in the context of a unilateral offer of compensation and you can see that once you have a deal the coop commission cannot be changed other than by agreement of the selling broker. This can be a real obstacle when the lender demands commission reductions as a condition of approving a short sale. If the selling brokerage is willing to risk the deal, they can refuse to reduce the selling side and thus place the entire reduction of the listing broker.
Multiple listing services as a rule will not allow listing agents to qualify their offer of compensation. You cannot offer "half of whatever I eventually agree to" in the MLS. Such an offer would not qualify as a unilateral offer of compensation because the payment term would be indefinite. You also cannot put "commissions subject to reduction by lender" or other qualifiers in the remarks section and use that to unilaterally reduce the commission split offered in the MLS. It is never a good idea to make real estate commissions a contingency of a sale as that can put the agents' interests in conflict with their clients.
One way to deal with the coop commission issue is to put information in the remarks section that warns the coop broker that lender approval may be conditioned on renegotiating the commissions. Such a warning is not binding and does not change the unilateral offer of compensation, but it will at least put agents on notice. The only other way to deal with the problem is to reach an agreement with the coop broker before they have procured a buyer.
Residential real estate agents tend to favor blind offers. Often the first anyone knows of a buyer is when their offer shows up on the listing agent's fax machine. It is difficult at that point to renegotiate the commission split. Renegotiation works much better if done before there is a written offer.
One way to get to the selling broker before there is an offer is to demand showings by appointment. When the agent makes the appointment, the listing agent can explain the situation and get their agreement to participate in any commission reduction that may be demanded by the lender. This agreement to participate can be memorialized with a simple email. That way, when the time comes, the agents will be on the same page and in agreement on how to proceed.
return to top
Dealing with Foreclosure Consultants
Understanding Foreclosure Consultants
With the downturn of the real estate market in 2008, a rising
tide of foreclosures created an entry opportunity for what are
called foreclosure consultants or mitigation experts. Often, these
consultants and experts team up with investors or equity
purchasers. The stated purpose of individuals and organizations
involved in foreclosure consulting or mitigation is to help
distressed homeowners avoid foreclosure. It is the threat of
foreclosure that drives short sale listings and brings real estate
licensees into contact with foreclosure consultants, mitigation
experts and the like. Click
here for Frequently Asked Questions on foreclosure consultants
and short sale negotiators.
Although there are honest and reputable people involved in foreclosure consulting and loss mitigation, these activities can involve very sharp business practices and even fraud. The federal Department of Housing and Urban Development (HUD) publishes a list of "HUD-approved Organizations" that provide foreclosure prevention related counseling. The list is available at: http://www.dfcs.oregon.gov/ml/foreclosure/counselors.html . The Oregon Department of Finance and Corporate Securities (DFCS) publishes extensive information about foreclosure scams. The information is available at: http://dfcs.oregon.gov/ml/foreclosure/foreclosure_fraud.html. General information about preventing and dealing with foreclosure is available from the Oregon State Bar on their Legal links Cable Television Show. The relevant episodes are available here.
Desperate homeowners facing foreclosure will often clutch at straws and are therefore easy prey for sharp operators. It is for that reason that the Federal Trade Commission (FTC) publishes a consumer information pamphlet called "Foreclosure Rescue Scams: Another Potential Stress for Homeowners in Distress." The publication is available online from the FTC at: http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre42.shtm . The pamphlet warns consumers about foreclosure scams, explains how common scams work and offers a list of "red flags." The FTC also publishes a list of lawsuits against, and settlements with, foreclosure "rescuers" here.
The FTC and multiple state attorney generals have been actively prosecuting foreclosure rescue companies that are conducting these types of scams on distressed homeowners. Some states, including Oregon, have enacted laws that specifically regulate these types of businesses. The FTC began its own rulemaking process in 2009 and has now issued a final rule impacting many real estate licensees in what is being called the MARS Rule (Mortgage Assistance Relief Services Rule) which became effective January 31, 2011.
The MARS rule covers short sale negotiations. The rule defines Mortgage Assistance Relief Services as a �service, plan or program offered or provided to the consumer in exchange for consideration� that provides services in relation to a consumer�s mortgage, including a possible loan modification which includes negotiating a short sale of a dwelling on behalf of a consumer. Additionally, the FTC defines Mortgage Relief Service Provider as someone who provides or offers to provide, or arrange to provide, any mortgage assistance relief service.
As you can see, these FTC definitions mean that, absent an exception, the MARS rule can have an impact on a real estate licensee who handles almost any type of short sale transaction.
While the rule is primarily aimed at companies that offer loan modification services to consumers, the rule falls squarely on real estate licensees as well and requires a disclosure be given by parties, including real estate licensees, who are involved in negotiating short sales. The FTC has defined “negotiate” to include contacting a lender about the possibility of short sale transaction involving a consumer loan. Therefore, it is recommended that the disclosure be given anytime you are dealing with a short sale where you represent the seller until and unless an exemption is granted to real estate licensees by the FTC. For a sample disclosure and more information on MARS please click here: http://www.realtor.org/letterlw.nsf/pages/0211mars?OpenDocument&LoginHowever, due to response from real estate licensees, the FTC issued a statement that it would not enforce most provisions of its MARS Rule against real estate brokers and their agents who assist financially distressed consumers in obtaining short sales from their lenders or servicers. Read more about the FTC forbearance here.
Like the federal government, Oregon has moved to protect homeowners from foreclosure scams. In 2007, the Oregon legislature responded to growing concern about foreclosure scams when it passed the Oregon Mortgage Rescue Fraud Protection Act: House Bill 3630 (HB 3630). A copy of the entire bill is available from the Oregon Legislature at: http://www.leg.state.or.us/08ssorlaws/0019.html . The new law is codified at ORS 646A.700 through 646A.765. Click HERE for a copy of the statutes. The Act has a number of features real estate licensees should be familiar with.
The Oregon Mortgage Rescue Fraud Protection Act applies to a person who acts as a "foreclosure consultant." The term is broadly defined to include anyone who, for compensation, offers to help a homeowner stop foreclosure or in some way renegotiate or otherwise modify a loan or rights under a trust deed or mortgage. Real estate licensees are exempt from the Act "if acting within the scope of that license." To act within the scope of a real estate license means to act under a listing agreement or as the representative of a buyer.
The Fraud Protection Act creates contractual notice, rescission and cancellation rights for homeowners who contract with foreclosure consultants. Foreclosure consulting can be done only under a written contract. The written contract must be presented to the homeowner at least twenty-four hours before it is signed by the homeowner. It must be in the language spoken by the homeowner and used in discussion between the homeowner and the consultant. The terms of the service and payment must be plainly expressed. The contract must contain a statutory notice that begins with the following warning: "THIS IS AN IMPORTANT LEGAL CONTRACT AND CAN RESULT IN THE LOSS OF YOUR HOME. YOU SHOULD CONTACT A LAWYER OR OTHER PROFESSIONAL ADVISER BEFORE SIGNING." If the consultant does not meet the requirements of the Act, they are in violation of the Unlawful Trade Practices Act.
Under the Act, foreclosure consulting contracts can be cancelled at anytime by the homeowner. The consultant must provide the homeowner with a statutory cancellation form. A copy of a form that meets the statutory requirements is available from the state at: http://www.cbs.state.or.us/external/dfcs/forms/cancellation_notice.doc If the homeowner exercises their right to unilaterally cancel the contract, they must pay for any services actually delivered prior to cancellation and any money expended by the consultant on their behalf. Any consideration received by the consultant from a third party must be fully disclosed to the homeowner in writing. If the consultant is involved in facilitating or arranging for an equity conveyance (typically, to an "investor" or "equity purchaser"), the consultant cannot be paid by the equity purchaser.
Listings Involving Foreclosure Consultants
Real estate licensees come into contact with foreclosure consultants and mitigation experts because most "rescues" involve trying to sell the property usually as a short sale. The involvement of foreclosure consultants or loss mitigation experts in real estate sales conducted through real estate licensees raises serious risk management and business issues for the licensees involved. Licensees must be aware of potential for involvement in fraud. Even if no fraud is involved, potentially difficult agency issues can arise when the seller has hired a foreclosure consultant. The viability of listings involving foreclosure consultants must always be assessed from a business as well as a legal and risk management point of view.
Most foreclosure consultants are not licensed to practice real estate. That means sharing any part of a commission, or even promising to share any part of a commission, is illegal. Foreclosure consultant will sometimes have schemes for evading the commission sharing rule. Some of these may, depending on how exactly they work, be legal if the payment comes from a party to the contract rather than the agent. Such arrangements, however, will tend to tie the agent to the consultant's business and business practices. No agent should even agree to any arrangement regarding the commission when a foreclosure consultant is involved without first checking with their principal broker.
Avoiding Involvement in Fraud
Real estate licensees who list property for owners involved with foreclosure consultants, loss mitigation experts, investors or equity purchasers must first make up their mind whether they should be involved at all. Often, the consultant will have some contractual arrangement with the seller before the property is listed for sale. That means a dispassionate investigation of the consultant or expert and the nature of their relationships with the seller is needed before agreeing to list the property. That kind of investigation starts with finding out whether the mitigation expert or consultant is licensed to do business in Oregon. That information is available from the state online at: http://www.filinginoregon.com/ .
A quick check of FTC enforcement actions at the national level is
a good second step. That can be done on-line at the Federal Trade
Commission's website:: http://ftcsearch.ftc.gov/search?q=foreclosure&site=NewsRelease&proxystylesheet=ftc_consumer&
skip=o&output=xml_no_dtd&client=ftc_consumer&access=p
. Finally, a call to the Financial Fraud/Consumer Protection
Section of the Oregon Attorney General's office (503-947-4333)
will tell the licensee if complaints against the particular
individual or company have been filed in Oregon. Having this kind
of information before taking the listing is essential because it
is much easier to decline a listing than get out of one
after-the-fact.
Being licensed to do business in Oregon and not appearing on any government listing related to foreclosure scams does not mean it is a good idea to be involved with a particular company. If possible, the licensee should review the mitigation company's advertising. The FTC singles out the following advertising messages commonly used by what they call "scam artists":
"Stop Foreclosure Now!"
"We guarantee to stop your foreclosure."
"Keep Your Home. We know your home is scheduled to be sold. No Problem!"
"We have special relationships within many banks that can speed up case approvals."
"We Can Save Your Home. Guaranteed. Free Consultation"
"We stop foreclosures everyday. Our team of professionals can stop yours this week!"
Ads like these are aimed at desperate homeowners and intended to convey that an easy fix is available. That kind of advertising should put the licensee on guard and cause him or her to look closely at how the consultant's or expert's program actually operates.
Although new scams, and variations on old scams, arise all the time, there are a number of common scams to watch out for. Phony foreclosure counseling or "help" is the simplest of the common foreclosure scams. Under this kind of scam, the "consultant" promises to negotiate some kind of deal with the lender, takes a fee up front and then simply disappears. A real estate licensee can diligently market the property while the consultant who is supposed to be negotiating with the lender is long gone.
A particularly sinister variation of the phony help scam involves having the homeowner make the mortgage payments to the consultant while the "negotiations" are taking place. No negotiations ever take place. The scam artist simply keeps the mortgage payments until the lender finally forecloses. Real estate licensees involved in marketing the property while the seller sends his payments to the scam artist can find themselves a target of the seller's lawyers when the whole thing blows up. Licensees can also find themselves involved in the aftermath of a phony help scams when the now really desperate homeowner tries for a "quick sale" at the last minute. Usually, it is too late by the time the scam artist is done and therefore such listings are not practical from a business standpoint.
Along the lines of the phony help scam is the bankruptcy scam. In such scams, the "consultant" promises to stop a foreclosure at the eleventh hour for an upfront fee. Once they have the fee, they file bankruptcy on the homeowner's behalf promising to work something out with the lender. The bankruptcy filing does stop the foreclosure, but only temporarily. Meanwhile, the scam artist has moved on, leaving the homeowner with ruined credit and a complicated bankruptcy action to deal with. As with the phony help scam, real estate licensees find themselves marketing something that can no longer be sold. Licensees may also get involved in the aftermath of bankruptcy scams when the desperate homeowner tries for a "quick sale" at the last minute through the bankruptcy process. Unless experienced in sales involving bankruptcies, taking such listings may not be a good business decision.
By far the most dangerous of scams for real estate licensees are those that involve equity transfers. An equity transfer involves a conveyance of some kind between homeowner and consultant or between the homeowner and an "investor" or "equity purchaser" found or recommended by the consultant. The scam may involve the homeowner signing documents represented to be a new loan that actually transfer title to the "investor" in exchange for a "rescue" loan. Real estate licensees get involved when the investor lists the property for way more than the "rescue" loan. Dealing with this kind of listing is covered later in this section.
A licensee who works with an investor who has obtained the property by fraud can easily be drawn into the resulting lawsuits especially if the licensee and "investor" establish an ongoing relationship that involves listing all of the investor's properties. Even when the equity transfer does not involve blatant fraud like misrepresenting documents, it may involve very sharp business practices and heavy sale pressure. The wider the margin between what the "investor" paid and the listing price, the more potential there is for fraud or sharp practices to be involved. Careful assessment of the risk involved in representing such "investors" in the re-sale of the home is essential.
Another popular scam is the "rent to buy" scam. Rent to buy is an equity purchase scam in the sense that the homeowner conveys title to the consultant or investor. Instead of then selling the property for a huge profit, the scam artist lets the former owner rent the house until they can buy it back. Often, however, the terms of the buy back are so onerous the homeowner has no real chance of ever completing the deal. Or, the new owner may simply raise the rent until the homeowner starts missing payments and then evict the homeowner and sell the house. When they go to sell they house, they will usually want to list it with a licensee.
A variation on the "rent to buy" theme involves a homeowner who has stopped making payments and moved out of the property conveying the property to the scam artist who is supposed to have "special knowledge" that allows them to sell the property and split the profits with the homeowner. The mortgage remains with the homeowner. The scam artist then lists the property and either rents it out or seeks a lease/option buyer. They then collect the rent and wait for the lender to foreclosure on the original homeowner. Because the scam involves an equity transfer and subsequent lease, lease purchase or sale, real estate licensees can easily get caught up in such scams.
Avoiding being caught up in foreclosure scams is a matter of diligence. On the listing side, that diligence begins with a careful analysis of agency relationships. Deciding who your client is, or ought to be, is always the first step. That begins by focusing closely on who is asking you to do what. If the seller has approached you to market the property and has hired a foreclosure consultant to negotiate with the lender, you have one client (the seller) who has two agents (you and the consultant). In that case, your duty is to the seller alone.
Representing a seller who is using a foreclosure consultant is not a comfortable position to be in whether there is fraud involved or not. If there is fraud, and the agent says nothing, the seller is likely to conclude the agent was in on it. On the other hand, if the agent does say something and there is no fraud, they risk a business liable/contract interference claim by the consultant. That is why the first step should always be to check out the foreclosure consultant. If the company isn't registered in Oregon, or their name appears on a government fraud list, the wise agent will avoid the listing.
If there is no obvious problem with the consultant or their company, try to get a look at the consultant's contracts and advertising before taking the listing. If there is no written contract, the consultant is probably in violation of the Mortgage Rescue Fraud Protection Act. If there is a contract, make sure it contains the required warning language and statutory cancellation form. If all that is in order, look at how the consultant is being paid. This is where upfront fees, rent-backs, equity transfers and the like should come under careful scrutiny. The question here is not one of fraud, but of whether involvement with these practices is a wise business decision.
If the consultant and firm don't check out, or you feel uncomfortable in anyway regarding the structure of the consulting fee, don't take the listing. If you do take a listing where the seller has engaged a foreclosure consultant any foreclosure consultant, even the most reputable you should make certain the seller clearly understands the scope of your relationship. You want to make certain the seller understands that you are not responsible for the consultant, the consultant's conduct, seller's contract with the consultant, the wisdom of hiring the consultant, or the outcome the consultant achieves. That can be done with a disclaimer attached as an addendum to the listing agreement. Here is a sample of such a disclaimer:
Seller under this Listing Agreement has entered, or will enter, into a separate written agreement with a "foreclosure consultant" who has agreed to provide certain services to the seller under a separate agreement. Seller understands and acknowledges that the listing broker, listing company and the principal broker involved in this Listing Agreement are not responsible for the consultant, the consultant's conduct, Seller's contract with the consultant, the wisdom of hiring the consultant or the outcome the consultant achieves. The scope of the services provided Seller under this Listing Agreement are limited to marketing the property to find a buyer ready, willing and able to purchase on terms agreeable to Seller and assisting Seller in performance and closing of any resulting sale contract. Although the listing broker will cooperate with Seller's consultants as directed by Seller, neither the listing broker or the broker's principal broker will be responsible for advising Seller on any aspect of the consultant's services, the terms of the consultant's contract or the consultant's conduct in performing services under the contract. Seller is advised to exercise extreme care in entering into any agreement with a foreclosure consultant, or an investor or equity purchaser found or endorsed by the consultant. Foreclosure consulting services are subject to the Oregon Mortgage Rescue Fraud Protection Act. Seller is advised to seek competent legal advice from an attorney regarding the terms, conditions, obligations and services provided by any foreclosure consultant as well as the consultant's conformance with state laws and regulations. Seller acknowledges that such advice is beyond the scope of a real estate licensee's training or expertise and Seller is therefore not relying on the listing broker, listing brokerage or the principal broker in any way with regard to the foreclosure consultant or the consultant's services or conduct.
Click HERE to download a copy of the sample disclaimer.
Another situation that can arise when working with foreclosure consultants or other mitigation experts is when the consultant, or an investor or equity purchaser of some kind working with the consultant, wants to list the property. Such situations can be fraught with peril for a real estate licensee and, therefore, must be very carefully and dispassionately reviewed. Principal brokers are well advised to have a policy that forbids brokers from entering into any listing agreement with anyone who is not the owner of record at the time the listing is taken unless the listing has been reviewed and pre-approved by the principal broker.
The reason for having such a policy is twofold. First, foreclosure consultants and their associated investors or equity purchasers are not usually the owner of the property they want to list. Instead, they usually have some sort of contingent interest such as an unexercised option, contingent sale contract or limited power of attorney. Whatever the vehicle used by the consultant, investor or equity purchaser, if they are not presently the owner of record (or have recorded power of attorney that specifically grants them the right to sell this piece of real property on the record owner's behalf), the broker must have the true owner's written permission to market and show the property. This is the case because of real estate advertising rules and civil laws like those for trespass. It is critical that any listing file for a listing with anyone other than the record owner contain a copy of the record owner's written permission to market and show.
Demanding the written permission of the record owner to market and show does not make the record owner the listing broker's client. It does, however, raise the second reason for extreme caution when listing property for a foreclosure consultant or their investor or equity purchaser the potential for unintended or misunderstood agency relationships and the resulting conflicts of interest. Simply put, the broker can find themselves caught between the interests of the record owner who is not their client, but has given the broker permission to market and show, and the consultant or investor who is their client because they signed the listing.
As with any potential conflict of interest, the solution (other than avoiding the situation altogether) is full disclosure. Here, the consultant or investor is the client, not the record owner. The broker needs something in the file that shows the record owner has not only given marketing and showing permission, but understands that the broker does not represent the record owner, does represent the consultant or investor but is not responsible to either for the relationship or transaction between the record owner and the consultant or investor. That means a disclosure to the client consultant or investor that, with their permission, is shared with the record owner. Here is sample of such a disclosure:
Seller under this Listing Agreement has entered, or will enter, into a separate written option, purchase or other binding agreement with record owner of the listed property. The record owner has agreed in writing that the listing brokerage may market and show the property on behalf of Seller. Seller agrees the listing broker may provide a copy of this disclosure to the record owner. Seller, and record owner, understand and acknowledge that neither the listing broker, listing brokerage or the principal broker involved in this Listing Agreement are responsible for the agreement between Seller and the record owner, it terms, provisions, fairness or consequences. The scope of the services provided under this Listing Agreement are limited to marketing the property to find a buyer ready, willing and able to purchase on the terms of this Listing Agreement and assisting Seller in performance and closing of any resulting sale contract between Seller and a subsequent purchaser. Although the listing broker will cooperate with the record owner as directed by Seller in showing the property, neither the listing broker nor the broker's principal broker will be responsible for advising record owner or Seller on any aspect of the agreement between Seller and the record owner. Seller and record owner are advised to seek competent legal advice from an attorney regarding the terms, conditions, obligations and conformance with state laws and regulations of their agreement. Seller and record owner acknowledge that such advice is beyond the scope of a real estate licensee's training or expertise. Seller is not relying on the listing broker, listing brokerage or the principal broker in any way with regard to the agreement between Seller and the record owner. The record owner is hereby specifically advised that the listing broker, the listing brokerage and the principal broker represent only the Seller under this Listing Agreement and do not represent the record owner and are not in anyway responsible to the record owner.
Click HERE to download a copy of the disclosure.
The final issue when it comes to dealing with foreclosure consultants is the business wisdom of the relationship. Certainly, no business relationship is wise if there is any hint that fraud may be involved. In that regard, it is worth keeping in mind the ten "red flags" published by the Federal Trade Commission (FTC). The FTC recommends that anyone looking for foreclosure prevention avoid any business that:
- - Guarantees to stop the foreclosure process no matter what your circumstances
- - Instructs you not to contact your lender, lawyer, or credit or housing counselor
- - Collects a fee before providing you with any services
- - Accepts payment only by cashier's check or wire transfer
- - Encourages you to lease your home so you can buy it back over time
- - Tells you to make your mortgage payments directly to it, rather than your lender
- - Tells you to transfer your property deed or title to it
- - Offers to buy your house for cash at a fixed price that is not set by the housing market at the time of sale
- - Offers to fill out paperwork for you
- - Pressures you to sign paperwork you haven't had a chance to read thoroughly or that you don't understand.
If there is no indication that fraud may be involved, and all involved are willing to let the broker use the proper disclosures and disclaimers, there is still the matter of whether the listing is worth the cost. This is a very hard thing for real estate brokers, especially in a down market where listings are scarce. Private foreclosure consultants, investors and equity purchasers have learned that real estate licensees are often willing to absorb the cost of marketing real property without regard to the likelihood of a sale. This willingness is, in effect, a subsidy for down market investors.
Because they do not need to expend money on marketing the property, consultants and investors can focus their efforts and capital on finding and tying up distressed property. The more property they can find and tie up, the better their odds of making a profit. To the consultant or investor, it is strictly a numbers game. If they tie up a hundred properties and sell only one, they make money as long as the profit on the one exceeds the expense of tying up the hundred. Since they are not expending any money on marketing the property they tie up, they may not be, and generally are not, very concerned about market viability. The record owner and the real estate broker who pays for the marketing take the risk of no sale, not the consultant or investor.
In addition to the Fraud Protection Act, Oregon laws also regulate what are called "debt management services." The 2009 Legislature substantially changed the laws regarding debt management services found in ORS chapter 697. In House Bill 2191, the legislature expanded the existing definition of "debt management service" to include, among other things, "obtaining or attempting to obtain as an intermediary on a consumer's behalf a concession from a creditor including, but not limited to, a reduction in principal, interest, penalties or fees associated with a debt." A person who "provides or performs, or represents that the person can or will provide or perform a debt management service in return for or in expectation of money or other valuable consideration" must register with the Director of the Department of Consumer and Business Services (DCBS) and comply with DCBS rules and regulations. Unlike the Fraud Protection Act, there is no express exemption in HB 2191 for real estate licensees.
The key to dealing with the debt management services laws is to avoid being paid for any activity that falls within the definition of "debt management services." It is the "in return for" and "in expectation of" language in the law, instead of a specific exception, that protects ordinary real estate activity. As long as the real estate licensee is being paid, and expects to be paid, only a real estate commission pursuant to a listing, the incidental assistance offered the seller in obtaining creditor consent to the transaction in a short sale should not be considered debt management services. On the other hand, a real estate licensee who hires out to sellers listed with other agents, or FSBO's, or operates on behalf of "investors" or "equity purchasers" or otherwise is involved in short sales other than under a listing agreement with the owner, needs to carefully consider debt management services regulations.
Real estate licensees involved in short sales under a listing agreement with the owner of the property, should carefully spell out their involvement in a written addendum to the listing. In this way, problems with both the Fraud Protection Act and Debt Management Service laws can be avoided by explaining in writing the exclusive real estate nature of the relationship. In this way, it can be made clear that the real estate licensee is being paid a real estate commission for providing brokerage services and not for obtaining agreements with the seller's creditors regarding the seller's debts. The real estate deal calls for the creditor's consent sufficient to clear the title; it does not require the real estate agent to negotiate new terms for the note or mortgage agreement between seller and creditor regarding the underlying indebtedness. That remains the seller's responsibility. Click Here for a sample Addendum to Short Sale Listing Contract.
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